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Notes to the Financial Statements
VTech Holdings Ltd Annual Report 200650
19 Financial Instruments
The Group enters into foreign exchange contracts and interest
rate swaps to hedge certain exposures on fluctuations of
foreign currency exchange rates and interest rates respectively.
The Group does not use derivative financial instruments for
speculative purposes.
Credit risk
Financial assets which potentially subject the Group to credit
risk consist principally of cash, short-term deposits and trade
debtors. The Group’s cash equivalents and short-term deposits
are placed with major financial institutions. Trade debtors are
presented net of the allowance for doubtful debts. Credit risk
with respect to trade debtors is limited due to the large
number of customers comprising the Group’s customer base
and their dispersion across different industries and
geographical areas. Accordingly, the Group has no significant
concentration of credit risk. In addition, credit risks are
mitigated by the use of insurance plans.
The Group manages these risks by monitoring credit
ratings and limiting the aggregate risk to any
individual counterparty.
Foreign exchange risk
The Group enters into foreign exchange contracts in order to
manage its exposure to fluctuations in foreign currency
exchange rates on specific transactions. Foreign exchange
contracts are matched with anticipated future cash flows in
foreign currencies, primarily from sales.
Interest rate risk
The Group’s income and operating cash flows are affected by
the change in market interest rates in relation to its interest-
bearing loans. The Group uses interest rate swaps as cash
flow hedges of future interest payments to convert certain
borrowings from floating rates to fixed rates.
Fair values
The fair value of interest rate swaps is calculated as the present
value of the estimated future cash flows. The fair value of
forward foreign exchange contracts is determined using
forward exchange market rates at the balance sheet date.
Derivative financial instruments
Forward foreign exchange contracts and interest rate swaps
contracts were designated as cash flow hedges and
remeasured to fair values. The positive fair value of derivative
financial instruments at 31st March 2006 designated for cash
flow hedges were US$0.6 million (2005: nil).
Forward foreign exchange contracts
The net fair value gains/(losses) at 31st March on open
forward foreign exchange contracts which hedge anticipated
future foreign currency sales and purchases will be transferred
from the hedging reserve to the consolidated income
statement when the forecasted sales and purchases occur, at
various dates between 1 month to 6 months from the balance
sheet date.
Details of the movements of fair value gains/(losses) arising
from forward foreign exchange contracts entered by the
Group are set out in note 18 on the financial statements.
The contracted amounts of the outstanding forward exchange
contracts at 31st March 2006 were US$24.3 million (2005: nil).
The Group does not anticipate any material adverse effect on
its financial position resulting from its involvement in these
financial instruments, nor does it anticipate non-performance
by any of its counterparties.
Interest rate swaps
At 31st March 2006, there were no outstanding interest rate
swaps (2005: nil).
Fair values
The fair value of trade debtors, bank balances, trade creditors
and accruals and bank overdrafts approximate their carrying
amounts due to the short-term maturities of these assets and
liabilities. The fair value of term loans and obligations under
finance leases is estimated using the expected future
payments discounted at market interest rates.
The weighted average effective interest rate on short term
bank deposits was 4.3% (2005: 2.6%) and these deposits had
an average maturity of one day to one month.
20 Commitments
2006 2005
US$ million US$ million
(i) Capital commitments for
property, plant and equipment
Authorised but not
contracted for 48.8 45.1
Contracted but not
provided for 5.9 2.9
54.7 48.0
(ii) Operating lease commitments
The future aggregate minimum
lease payments under
non-cancellable operating
leases are as follows:
Land and buildings
In one year or less 9.9 9.3
Between one and two years 6.5 8.2
Between two and five years 10.6 12.7
In more than five years 2.4 3.4
29.4 33.6